Fulfil your dreams with SIP
This episode covers the process of Systematic Investment Plan (SIP) with emphasis on portfolio diversity and risk balancing for wealth creation.
SIP for wealth creation
Many people want to create wealth by investing in the equity market, but most of them are not able to do so because of shortage of capital and/or time. To overcome this, an investor can opt for Systematic Investment Plan (SIP).
A Systematic Investment Plan allows an investor to invest funds at regular intervals, say each month. In the long run, regular and disciplined investing via SIP can accumulate significant amount of wealth for investor. SIP is the smartest way to invest in the equity market and its advantages are as follows:
SIP reduces portfolio volatility
One of the primary benefits of investing via SIP is that an investor is not required to time the market. If one invests a lump sum amount in an equity fund and the market falls soon after, then the investor's portfolio's value falls significantly. Instead if the investor chose to invest an amount each month, the investor will be able to benefit from lower unit price of the fund when market falls. Thus, the SIP allows the investor to average over time and he can enjoy lower volatility in the value of investment as compared to the lump sum approach.
For example, assume that an investor starts a SIP of Rs. 5,000 per month in an equity mutual fund scheme for a year. The investor made a profit of Rs. 17,090 despite a decline in NAVs for 5 consecutive months because the investor received more units when the NAV was falling. When the NAV retrieved, the investment value surged. In addition, the average NAV was Rs. 10.12 despite the fact that NAV for 6 months was above Rs. 10.12. This phenomenon is called 'Rupee Average Costing'.
|Month||SIP||NAV||Units||Total Units||Amount Invested||Value of Investment|
|1||Rs. 5,000||Rs. 10||500||500||Rs. 5,000||Rs. 5,000|
|2||Rs. 5,000||Rs. 12||417||917||Rs. 10,000||Rs. 11,000|
|3||Rs. 5,000||Rs. 13||385||1301||Rs. 15,000||Rs. 16,917|
|4||Rs. 5,000||Rs. 11||455||1756||Rs. 20,000||Rs. 19,314|
|5||Rs. 5,000||Rs. 10||500||2256||Rs. 25,000||Rs. 22,558|
|6||Rs. 5,000||Rs. 9||556||2811||Rs. 30,000||Rs. 25,302|
|7||Rs. 5,000||Rs. 8||625||3436||Rs. 35,000||Rs. 27,491|
|8||Rs. 5,000||Rs. 7||714||4151||Rs. 40,000||Rs. 29,055|
|9||Rs. 5,000||Rs. 9||556||4706||Rs. 45,000||Rs. 42,356|
|10||Rs. 5,000||Rs. 11||455||5161||Rs. 50,000||Rs. 56,768|
|11||Rs. 5,000||Rs. 13||385||5545||Rs. 55,000||Rs. 72,090|
|12||Rs. 5,000||Rs. 13||385||5930||Rs. 60,000||Rs. 77,090|
Allows to invest even a small amount
One can start a SIP with a sum as small as Rs. 500 per month. Most of the equity funds have a monthly or quarterly SIP option. There are set dates offered by the AMC – 1st, 7th, 10th, 15th, 20th and 21st day of every month. You can link your bank account to start an automated debit and choose a date and frequency option, as per your convenience.
Long term wealth creation
SIP is one of the best ways to create wealth in the equity market. A person can become a corepati by investing only Rs. 250 per day in mutual funds for 20 years, assuming 15% return per year. The total investment will be Rs. 18.25 lakh and the total gains will be ~Rs. 81.75 lakh over 20 years; this is also the best ways to get the benefit of 'Power of Compounding'.
*Assumed that investment will grow at 15% CAGR
How to Start a SIP?
An investor can start a SIP on a pre-decided date every month using Electronic Clearing Service (ECS) or direct debit facility available with banks. Each month, money will be automatically transferred from the investor's bank account to the Mutual Fund account.
Mr Abhimanyu Sofat is the Vice President of Research at IIFL. He was previously the Co-Founder at AdviseSure.com, a smart wealth management service platform. Mr Sofat has over a decade of experience in research, fund management, personal finance and has appeared/published in top media like CNBC TV18, ET NOW, Forbes, Bloomberg, Economic Times etc.
Ask an Expert
What is a Systematic Investment Plan (SIP)?
A Systematic Investment Plan (SIP) is way to invest a specific amount in mutual funds schemes regularly. Most of the funds have a monthly or quarterly SIP option.
How to start a SIP?
Investors can instruct their brokers/distributers to start SIPs in mutual fund schemes. Investors can specify schemes, periodicity, and period of investment. Investors can give post-dated cheques or auto-debt instructions to make investments as scheduled.
What is the minimum SIP amount?
Investors can start SIP in a mutual fund scheme with a sum as small as Rs. 500 per month. There is no maximum cap in SIP amount until specified by the scheme.
Can I change my SIP amount later?
Investors can also increase or decrease their SIP amount latter. They have to specify the alteration to their broker/distributers.
What are the SIP dates available?
Generally, mutual funds offer the following SIP dates – 1st, 7th, 10th, 15th, 20th and 21st of every month. Investors can select any date from these SIP dates.
Can I stop a SIP?
Yes, investors can stop SIPs. Suppose if you want to discontinue a SIP, then you have to inform the fund house/broker/distributer 30 days prior to the subsequent SIP date. The SIP will get discontinued, but you will be able to keep the funds with the scheme as long as you wish
What are minimum and maximum SIP periods?
Most of the mutual funds have put minimum SIP period to 6 months. However, there is no maximum SIP period and investors can continue to invest throughout their life.
Can I switch to a different scheme in SIP?
Yes, you can switch from one scheme to another by giving a switch request. If everything is fine, then the switch request will be granted, and investment will be made in the new scheme, else it will continue to invest in old scheme.
What are the benefits of SIP?
There are several advantages of investing through SIP. Some are listed below -
- Power of Compounding - SIP helps investors to create wealth in long-term. By regularly investing small amount investors can accumulate significant corpus over long period because of compounding of returns.
- Rupee Cost Averaging - SIP helps in averaging out the cost as investors receive more units when market falls and fewer units when fall rises. In the long-run, as markets grow, investors can get better returns.
- Convenience and Regularity - SIP gives you the convenience to invest through Electronic Clearance Service (ECS) or Auto Debit facility offered by bank accounts. You can decide the amount and the mutual fund scheme. A fixed amount will get debited from your account on the specified date automatically.
- Disciplined investment - As you invest regularly, it makes you disciplined in your savings, thereby resulting in wealth accumulation. Disciplined investing is a key to earn good results over long-term.
Can I start SIP anytime?
Investors can start SIPs anytime whether the market is falling or rising. The whole concept of the SIP is to accumulate wealth over a long period in different market cycles.
Which mutual fund schemes accept SIPs?
Generally, all mutual fund schemes accept the SIP except Liquid funds.
Is there Entry/Exit load of SIP?
Generally, Mutual funds don't have entry load on SIP; however to discourage exit, mutual funds may have exit load.